You’re Chinese, not Japanese, so do not worry, says IMF PDF Print E-mail
Wednesday, 13 April 2011 00:00
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Sunil Jain and Sharad Raghavan

The Japanese messed up. And they had other problems like massively excess credit going to real estate. You don’t have the same problems, and you’re more efficient, so don’t worry. That, in a nutshell, is what the IMF is telling the Chinese government in an attempt to convince it that revaluing the renminbi will not lead to a loss of growth of the kind that happened to Japan, for several decades, after it revalued the yen sharply in the mid-80s. The lay view, for many years, has been that Japan bowed to US pressure in 1985 and appreciated its currency — as is the situation now, this would boost demand in non-US markets, and help the US grow – and this is what led to the lost decades.

A box in the latest World Economic Outlook (WEO) explains how the Japanese government got it totally wrong following the Plaza Accord in September 1985 which resulted in the yen appreciating 46% in 15 months — Germany appreciated the deutsche mark by a similar amount, but didn’t suffer a similar loss of growth, the WEO argues, to clinch its case.

It’ll be interesting to see if the Chinese are convinced by this latest argument, but even trenchant critics of the IMF agree with its China-Japan arguments. Planning Commission member Saumitra Chaudhuri believes the IMF worsened the east Asian crisis by wanting to allow banks to fail, but adopted a different (though correct) approach in the US financial crisis. On Japan, however, he says, “Both Japan and Germany revalued by similar amounts but Germany didn’t suffer … there was excessive credit growth in Japan and its banks didn’t want to clean up their books … Japan allowed the real estate bubble to build up ...”

The IMF makes the following points as to why China isn’t a Japan:

* After Japan’s export and GDP growth got hit by the huge appreciation in 1986, the Japanese panicked and, so a large fiscal stimulus was begun and interest rates were lowered sharply — an estimate quoted by the IMF says real interest rates were 4 percentage points too low in 1986-88.

* Financial deregulation of the 1980s saw large firms leaving banks to raise money from capital markets and so banks lent too much to real estate — in 1985-90, bank lending to real estate rose 150%, or twice the pace of overall bank lending to the private sector.

* As in the US now, banks in Japan were very leveraged; what made things worse was that the collateral for loans was land, so a fall in land prices hit the banking system badly.

* The Japanese authorities took forever to recognise the problem.

Having pointed out where Japan went wrong, the IMF argues China is different since its banks and corporates are nowhere as leveraged (see graph); two, since China’s exports aren’t as high-tech as Japan’s were, it has a lot of scope to increase exports even if the renminbi appreciates by increasing their quality/value-add. Lastly, it argues, since China controls its currency unlike Japan, it’s unlikely it will allow an appreciation that’s so fast it will hit its growth.

Ficci director-general Rajiv Kumar adds, “There is no comparison between the two. Japan was forced to appreciate and China resisted. China says that it has learnt from the Plaza Accord, and will not make the same mistakes as Japan did.” In any case, he adds, China used its fiscal stimulus sensibly, to build infrastructure, and not raise up housing prices.”

DK Joshi, chief economist with rating firm Crisil agrees when he says, “The contexts are very different (between China now and Japan then). China’s trade competitiveness will go down, but the change will be slow and gradual. Not in the manner that happened in Japan.” As for asset bubbles, he says “China has been proactive in dealing with asset bubbles. The last time they had a bubble, when housing prices went up, they handled it well, brought it down to manageable levels.”

Last Updated ( Sunday, 27 November 2011 17:57 )

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